Economies are making a transition beyond services into what is popularly described as the sharing economy. The reach of sharing extends far beyond the sharing of consumer assets and houses. Jeremy Rifkin calls the sharing economy “the first new economic system that’s entered onto the world stage since capitalism and socialism”. He sees it evolving from the convergence of a matured communications internet with a digitized renewable-energy internet and an automated-transport internet. The three internets “ride on top of a platform called the Internet of Things (IoT)…to create a global brain and nervous system that’s digital for planetary interconnectivity.”

Jeremy Rifkin’s concept is tied to his theory of zero marginal costs. He traces zero marginal costs to the digitalization process which causes “an exponential transformation in plunging fixed costs and plunging marginal costs…it’s forcing a new business model, because when your marginal costs become low, your profit margins shrink.”

But “while near-zero marginal cost would impact virtual goods, we never thought it would move over to the physical world…the IoT just blew away the firewall…now have millions of people producing their own renewable energy and starting to move it onto an energy internet, and that energy the marginal cost is zero. And we now have millions of young people in car sharing and within the next few years those vehicles are going to be electric, operating with zero marginal cost renewable energy. They’re going to be printed with recycled materials, 3D printing — that’s already happening — and they’re going to be driverless with no labor cost.”

Jeremy Rifkin notes “in the sharing economy, social capital is as vital as finance capital, access is as important as ownership, sustainability supersedes consumerism, cooperation is as crucial as competition and exchange value in the capitalist marketplace is increasingly supplemented by shareable value on the Collaborative Commons. Millions of people are already transferring bits and pieces of their economic life to the sharing economy. Prosumers are not only producing and sharing their own information, news, knowledge, entertainment, green energy, transportation and 3-D-printed products in the sharing economy at near zero marginal cost.”

One key issue is whether economies are preparing to build the infrastructure to support sharing. Jeremy Rifkin points out “when your businesses are plugged into a second industrial revolution infrastructure of centralized telecommunication, fossil fuel, nuclear power, internal-combustion transportation for roads, rail, water and air transport, and we know that the productivity in that infrastructure peaked…it’s the productivity of the infrastructure that has now declined. This is really crucial because…you can have market reform and labor reform and fiscal reforms, and incentivize a million jobs or innovations, and it won’t make any difference as long as your businesses are plugged into that second industrial revolution infrastructure…That’s the key, new infrastructure.” In this regard, “staying entrenched in the sunset of the Second Industrial Revolution, with fewer economic opportunities, slowing GDP, diminishing productivity, rising unemployment and an ever-more polluted environment – is unthinkable, and would set the world on a long-term course of economic contraction and decline in the quality of people’s lives.”

He notes the vision for “a new economic paradigm that can increase productivity, create new economic opportunities and put people back to work, ensuring a more vibrant and sustainable society, while transitioning their economies out of carbon-based energies and technologies and into renewable energies…is already taking hold in Germany and other countries.”

In the EU, the “communication network will have to be upgraded with the inclusion of universal broadband and free Wi-Fi. The energy infrastructure will need to be transformed from fossil fuel and nuclear power to renewable energies. Millions of buildings will need to be retrofitted and equipped with renewable energy-harvesting installations and converted into micro power plants. Hydrogen and other storage technologies will have to be built into every layer of the infrastructure to secure intermittent renewable energy. The electricity grid of the European Union will have to be transformed into a smart digital Energy Internet to accommodate the flow of energy produced by millions of green micro power plants. The transportation and logistics sector will have to be digitalized and transformed into an automated GPS-guided driverless network running on smart roads and rail systems. The introduction of electric and fuel cell transportation will require millions of charging stations. Smart roads, equipped with millions of sensors that feed real-time information on traffic flows and the movement of freight, will also have to be installed.”

Jeremy Rifkin believes “the massive build-out of the IoT infrastructure for a Third Industrial Revolution in every locality and region of the world is going to spur an extended surge of salaried labor that will run for 40 years or more, spanning two generations. However, in the long run, the phase-in of a smart industrial plan like Digital Europe will ultimately lead to a highly automated capitalist market economy by mid-century, operated by small professional and supervisory workforces using advanced analytics, algorithms and artificial intelligence. The maturing of this smart infrastructure will lead to a migration of employment from an increasingly automated capitalist market to the growing social economy. While fewer human beings will be required to produce goods and services in the market economy, machine surrogates will play a smaller role in the non-profit social economy for the evident reason that deep social engagement and the amassing of social capital is an inherently human enterprise. The social economy is a vast realm that includes education, charities, health care, child and senior care, stewardship of the environment, cultural activity and the arts, sports and entertainment – all of which require human-to-human engagement.”

Jeremy Rifkin’s outline of the sharing economy is probably the broadest in terms of coverage. In this regard, many macroeconomic aspects of sharing require greater elaboration as sharing changes the way the economy is organised; and this changes the macroeconomic levers and vulnerabilities.

Jeremy Rifkin points out the “second industrial revolution depended on fossil fuels: fertilizers, pesticides, construction materials, pharmaceutical products, synthetic materials, power, transport, heat, and light. So when oil starts to go over $90, those other prices go up. And when oil hits $115 or more a barrel, you start to see prices for everything becoming inordinately high and purchasing power slows…every time we try to regrow the economy since then, all prices go up…so we’re in kind of a growth-shutdown period, and wherever there’s oil we have failed states.”

There are several consequences when economies shift from oil to solar and wind as their main sources of energy. The first is that the role of oil prices as a lever of economic activities becomes inconsequential. The second is the emergence of new vulnerabilities in the form of stranded assets. Jeremy Rifkin explains “there are four major transmission companies in Germany, and they’re big global players…they were the best at organizing centralized energy…Because that requires centralization – fossil fuels, uranium. They’re found only in certain places. And then you have to ship them and refine them. It’s a really difficult task.”

However, “solar and wind have been on a plunging exponential curve on a fixed cost just like computers.…What’s happened to them in the last 10, 11 years as we’ve moved this renewable-energy internet into Germany is what happened to music, TV, publishing…The problem with solar and wind is the opportunity – it’s found everywhere…No big global company’s going to collect it everywhere. So you’re getting this distributed system of collection through energy cooperatives and it’s really power to the people – literally and figuratively…And the big four power companies — they’re out of it. They’re gone. They can’t scale it.”

Hence, Jeremy Rifkin notes “the power and transmission companies…are in pandemonium…there’s a hundred trillion dollars in stranded assets in the fossil-fuel industry…it’s your pipeline, it’s your infrastructure, your processing, your patents, your exploration rights, and what’s in the ground that’ll never come out because it no longer can compete.”

It is not just the assets of power and transmission companies that have become obsolete but also the assets and related employment of other industries impacted by zero marginal costs. Hence, the macroeconomic impact of sharing on productivity and economic growth is dependent on whether the positive effects can offset the deflationary impact of zero marginal costs and capital destruction[1].

A third consequence is the intensification of conflicts, not just for the frontline taxi and hotel industries, but across almost all activities. It is likely that further expansion of the infrastructure to support sharing activities will run into resistance from traditional businesses (e.g. utilities, telecommunications) seeking to re-exert their control.

The fourth consequence is the problem with the democratisation story associated with sharing. The expansion of sharing has been accompanied by dislocation effects from reorganisation, job uncertainties and widening inequalities. Economies that have aggressively implemented pro-digital policies are facing a populist backlash.

It also remains to seen how democratic a network of everyone owned by a few large companies can become. It is a question of whether the platform empowers or restrict the sharing of information and freedom of choice. In sharing, the value is created through social participation but for for-profit platforms, there is tension arising from the need to monetise value to provide attractive returns to shareholders[2].

But without a doubt, sharing is a game changer. As Jeremy Rifkin describes it, “pretty soon everyone’s going to be connected – all 7 billion people…it’s a remarkable historical event, and the millennials are already in a hybrid economic system each day. Part of the day they’re in the market exchanging goods and services for profit, part of the day they’re in the sharing economy and freely producing and sharing goods and services with no profit beyond the market, not in the GDP, but improving the quality of life that they enjoy.”

Overall, the challenge in moving forward are two-fold. One is whether there will be the build-up in infrastructure to support sharing and also to facilitate mass participation and self-organisation. The other is the readiness of governments, corporations and households to participate in a sharing economy – in terms of their organisational structures, roles, processes and expectations.

But the sharing economy is an incomplete paradigm. We talk about the sharing economy now because it is visible and fashionable but there are analytical gaps which may cause us to gloss over the outcomes for productivity, sustainability[3] and growth. As a matter of comparison, sharing is an activity very much like purchasing in the industrial economy and this limit our understanding of the new landscape challenges. There is a need to adopt a broader paradigm that provides fuller coverage of landscape dislocation as well as macroeconomic policy challenges. I propose the information society is the right paradigm. In my next article, I will review how the organisation of households change in the transition to an information society.

Organisation of households: Household formation and the housing market

Phuah Eng Chye

I was formerly a securities regulator and equities analyst. I started writing these articles (and a book) because I felt that there were a lot of economic theories that didn’t seem to match up to the realities we are facing. This also means that a lot of policies (based on these theories) are wrong. So I’ve tried to make sense of how things worked based on the paradigm of an information society. Its a challenging topic and difficult to pin down. This means I have had to explore issues over a wide range of policy areas. Over the next few months, I will cover the service economy, the sharing economy, household and work structures before moving onto policy issues on the anorexic economy (role of corporates, basic income, housing affordability) and the financialisation process (capital, monetary policy, securities regulation).